A Tribute to the Thoughts of Another and his Friend"Everyone knows where we have been. Let's see where we are going!" -Another

Monday, April 13, 2009

Hyperinflation by any other name

Hyperinflation by any other name, like devaluation, revaluation, monetary or currency collapse or "the denouement of unlimited money-creation", is still hyperinflation.

Hyperinflation is a psychological and monetary event. It is not an economic or financial market event. It occurs during and because of an economic and financial market collapse which includes catastrophic ongoing asset deflation.

I maintain that the Federal Reserve banks are not creating money out of the thin air.

Professor Fekete

He goes on to say...

The QTM is a linear model that may be valid as a first approximation, but fails in most cases as the real world is highly non-linear. My own theory predicts that it is not hyperinflation but a vicious deflation which is in store for the dollar. Here is the argument.

While prices of primary products such as crude oil and foodstuffs may initially rise, there is no purchasing power in the hands of the consumers... It turns out that the price rises are unsustainable as the consumer is unable to pay them. They will have to be rescinded. Retail merchants will start a damaging price war underbidding one another...

Apparently we won't be buying food if prices rise.

He then tells us that our dollars will continue increasing in value...

No longer can it be taken for granted that the denouement of unlimited money-creation will be hyperinflation with the Federal Reserve notes rapidly losing purchasing power. On the contrary, it could be an unprecedented deflation with the Federal Reserve notes being hoarded by the people, firms, and institutions as their purchasing power is actually increasing...

This is good news for Congress, that all those stimulus dollars will continually buy more and more real goods!

And finally he ends with...

The QTM, the corner stone of Milton Friedman’s monetarism, is the wrong prognosticating tool. The marginal productivity of debt is superior as it focuses on deflation rather than inflation.

The financial and economic collapse of the past two years must be seen as part of the progressive disintegration of Western civilization that started with the sabotaging of the gold standard by governments exactly one hundred years ago when in France and in Germany paper money was made legal tender...

Fed Chairman Ben Bernanke, who should have been fired by the new president on the day after Inauguration for his part in causing the cataclysm, a couple of years ago foolishly boasted that the government has given him a tool, the printing press, with which he can fight off deflations and depressions, now and forever. The reference to the QTM is obvious.

Now Bernanke has the honor to administer the coup de grâce to our civilization.

I have a few thoughts on this as you probably guessed. First of all, notice that Fekete is talking about "financial and economic collapse of the past two years". This is what precedes hyperinflations. But he ignores the psychological event that will follow and, as I stated at the top, he discounts and dismisses the monetary event.

From what I can tell, this is in contrast to his writings prior to a few months ago. Back then he focused on the psychological event that was "backwardation" in the gold market.

People from around the world keep asking me what advance warning for the collapse of our international monetary system, based as it is on irredeemable promises to pay, they should be looking for. My answer invariably is: "watch for the last contango in silver".

It takes a little bit of explaining what this cryptic message means. Contango is that condition whereby more distant futures prices are at a premium over the nearby. The opposite is called backwardation which obtains when the nearby futures sell at a premium and the more distant futures are at a discount. When contango gives way to backwardation in all contract spreads, never again to return, it is a foolproof indication that no deliverable monetary silver exists. People with inside information have snapped it up in anticipation of an imminent monetary crisis.

That will be the most dramatic event in the entire history of money, an event that I have, tongue in cheek, called "The Last Contango in Washington". The basis will give you an early warning signal...

...The basis will tell you well in advance when all the offers to sell real gold or silver are about to be withdrawn in all the markets of the world. Once that happens, infinite demand will confront zero supply. Don't say it can't happen here. It has happened locally in France in 1796, in Germany in 1923, in China in 1947, to mention but three episodes. This time it will happen globally.

What happened "in France in 1796, in Germany in 1923, in China in 1947"?? Oh yeah, hyperinflation happened! (to mention but three episodes)

Backwardation in gold has nothing to do with the opening salvo for hyperinflation. "Gold is not for sale at any price" is not the same thing as a runaway gold price. Rather, it is an indication that it has dawned on people how foolish it is to accept irredeemable promises to pay in exchange for gold, the ultimate means of payment.

What Mish seems to be missing is that it is not unthinkable that gold futures trading stops altogether for want of deliverable material, while the price of oil, grains, and other highly marketable commodities keep falling along with the rate of interest -- symptoms of deflation. This is precisely the problem that needs to be researched, but no university or government think-tank is doing it.

Mish says that the United States is not Zimbabwe. Who said it was? However, the United States dollar and the Zimbabwe dollar are no different in principle, if not yet in practice. They are both an irredeemable currency. Managers of the U.S. dollar are just making the first tentative steps to join the managers of the Zimbabwe dollar in Dante's Inferno. The eighth of the nine circles in Hell is reserved for perpetrators of fraud and false pretenses, among others, the managers of irredeemable currencies. As Dante describes it, their punishment is to be kept submerged in a cesspit full of excrement. Honestly, they don't deserve to be washed clean by Mish or anybody else.

This may have been Fekete's first encounter with Mish. And as we know, Mish and Karl Denninger are practically synonymous when it comes to deflationist bloggers. So it seems that Fekete spent 3 1/2 months reading Mish and at some point also started reading Denninger. Then, on March 30, 2009, Fekete published The Marginal Productivity of Debt in which he not only sounded exactly like Denninger, but he referenced Denninger twice, quoted him, and included a link to the Market Ticker at the bottom.

Now I suspect that Fekete took some direct criticism for this apparent credulity toward Denninger, because the article has now been deleted from Fekete's own site. [UPDATE 4/15: The article is back on Fekete's site today] And he has since written two more articles which don't mention Denninger once. I find this quite interesting.

Back to Fekete's latest article. He is still making the same mistakes that all "the deflationists" are making. He is seeing "asset deflation" and calling it deflation. He fails to differentiate between assets and necessities. He fails to differentiate between inflation and hyperinflation (which is really just asset deflation combined with monetary collapse). He fails to recognize that "financial and economic collapse" and asset deflation are not only compatible with hyperinflation, but they are prerequisites of it. And he fails to acknowledge that the monetary portion of hyperinflation is already baked into the cake, and all that is missing now is the psychological trigger. Previously Fekete had an acute awareness of this trigger, in his writings about backwardation. But now he seems to be backing away from that Thought and backing into something which fits the deflation he thinks he is seeing and reading about on the Market Ticker.

Remember, hyperinflation by any other name is still hyperinflation.

The following is a very good excerpt from Chris Laird of the Prudent Squirrel. He is not exactly a "hyperinflationist". But look at how he describes what he sees coming...

Huge tax deficits from a weak economy – higher taxes and likely targeting the huge pool of tax deferred accounts for revenue. Even possible nationalization of retirement funds – IE being forced to hold US T bonds. All it takes is an economic emergency for Congress to do all this – or a Presidential executive order. In other countries, just substitute your own country’s Treasury bonds for the US T bonds. Probably all the same things will happen in your country.

After that happens in the initial Bond market heart attack for US Ts, we get to phase two – effects on the USD and USD system…

This phase begins with a bond revolt and will either be an immediate cause of instant emergency tax hikes, and likely government nationalization or at least big tax hikes on tax deferred account withdrawals. The government does all this rapidly with little debate, as in last Fall 08, rapidly pushing through emergency measures.

The USD likely will start devaluing immediately if there is a bond revolt. Depending on when this bond revolt comes, the USD can devalue either orderly or rapidly and chaotically. Hopefully it is orderly. Think of an initial halving of your purchasing power, say over a period of a year.

Prices double or triple on everything essential in a year.

(Remember, we mentioned this is possibly going to happen in a few years, I am not talking in ten or twenty).

If the US bond market rebels on US Ts, expect foreign exchange restrictions. Expect your retirement accounts to have restrictions placed on them. On withdrawals, limits put on, etc. You will not be able to legally take money out of the US (or your own country).

In phase 3, the US fiscal deficits rapidly multiply to $4 or 5 trillion. Now the world holds its breath. Estimated time of this to happen is 2 years out max.

Phase 3 marks the beginning of the actual end of the USD and final devaluation of its remaining value. Hopefully, this is an orderly process. The likelihood is it’s not orderly, but chaotic.

OK, if the USD at this point is halving in value, prices doubling or tripling, we will have shortages. If prices cannot be raised fast enough, supply lines stop being refilled.

Once the USD starts its final decent, expect severe shortages in stores and even gas stations.

After all the chaos and so on, a new currency is started, probably one that is global or has global components.

I hate to say this but a typical revaluation of a totally collapsed currency will drop two to three zeroes off its denomination – devaluing your money by a factor of 1000 in purchasing power.

If the revaluation number is two zeroes, then if you have 10,000 USD today, when the new currency comes in – call it NewDollar – you will receive $100 in new dollars, 100 ND for your $10,000.

If you have not already put your wealth into paid off real things, and not relying only on financial accounts, you will lose your savings either through taxation or devaluations.

None of us in the West have seen anything like this, although there are a few older people who lived through the Depression who saw it, but then the USD did not collapse. This time it is going to collapse. Hard to say just when, but it’s already baked into the mix.

36 comments:

Andrew Dickson White ends his classic historical essay on hyperinflation, “Fiat Money Inflation in France,”with one of the more famous lines in economic literature: “There is a lesson in all this which it behooves every thinking man to ponder.” This lesson–that there is a connection between government over-issuance of paper money, inflation and the destruction of middle-class savings–has been so routinely ignored in the modern era that enlightened savers the world over wonder if public officials will ever learn it.

The list of nations succumbing to very high and/or hyperinflationary episodes since the French experience at the end of the 18th century is legion. Here are a few of the more notable occurrences:

1. The Greenback and Confederate states inflations in the United States during and after the Civil War between the States;

2. Arash of national hyperinflations after World War I including Russia (1921-1924, 213 percent annualized); Poland (1922-1924, 275 percent annualized); Austria (1921-1922, 134 percent annualized); Hungary (1922-24, 98 percent annualized) and the most famous of them all, the Nightmare German Inflation (1920-1923, 3.25 million percent annualized);

3. Another round of episodes during and after World War II including Greece (1943-1944, 8.55 billion percent annualized); Hungary (1945-1946, 4.19 quintillion percent annualized) and China (1949-1950, unmeasured);

4. A rash of post World War II episodes including two in Argentina, and one each in Brazil, Chile, Nicaragua, Bolivia, Peru, Poland, Russia/Ukraine and Yugoslavia/Serbia (1);

5. The Asian contagion (1997-1998) including Indonesia, Thailand, South Korea, the Philippines and Malaysia which managed to display deflationary and inflationary symptoms simultaneously.

According to an International Monetary Fund sponsored study by Stanley Fischer, Ratna Sahay and Carlos Veigh (2002), hyperinflations have been a rare commodity since 1947 and the dawn of the Keynsian era, but “much more common have been longer inflationary processes with inflation rates above 100 per cent per annum.” These they classify as “very high inflation” episodes. The study finds that close to 20% of the 133 countries studied experienced inflations of that magnitude. The average duration of these episodes was 40 months with a minimum of 12 months and maximum of over 200 months.

Not covered in the study is the myriad of double-digit inflation episodes since World War II (like the 1970s inflation in the United States) even though these events carried significant political and economic implications for the countries affected. Quite often though, these lesser inflations served as preludes to more debilitating events at some point down the road. Other times, as in the United States, public policies were instituted to smother the inflationary fires before they reached the critical stage.

All in all, it is difficult not to classify inflations of any size and duration as significant to the middle class. Few of us would gain comfort from the fact that the inflation we were experiencing failed to transcend the 100% per annum threshold or failed to escalate to a state of hyperinflation. Just the specter of double-digit inflation is enough to provoke some judicious portfolio hedging.

In 2012, the famous Andrew Dickson White essay you are about to read will celebrate its 100th anniversary. How can something written over 90 years ago describing monetary events occurring almost 215 years ago in France carry relevance for investors in the United States (and the rest of the industrialized world) today? The short answer is that the United States increasingly appears to be travelling a path similar to that of France in 1789 when the debasement of the currency, as Dickson White so matter of factly tells us, left the bulk of the population penniless. Fisher-Sahay-Veigh conclude that “the link with the French revolution supports the view that hyperinflations are modern phenomena related to printing paper money in order to finance large fiscal deficits caused by wars, revolutions, the end of empires and the establishment of new states.” How many Americans would read those words without some degree of apprehension?

What makes this particular dollar inflation even more dangerous than the assignat inflation studied by Dickson White is the potential corrosive effect it is having on the international economy as a whole. The French inflation was localized; the dollar inflation is internationalized transcending national boundaries and encompassing not just the world’s most powerful economies but, in one way or another, most of the world’s smaller, less-developed economies as well. Since the global village as a whole has never been in this situation before, it is difficult to determine how the current situation might resolve itself. Suffice it to say that the potential for an international dollar crisis is something about which we should all be concerned.

One of the better assessments where the present situation might lead us comes from former World Bank economist Richard Duncan, author of the recently published book, ‘The Dollar Crisis: Causes, Consequences and Cures. ‘ Duncan raises the specter of a dollar-based international hyperinflation:

“The most aggressive experiment in monetary policy in order to buy dollars in such extraordinary amounts that global interest rates are being held at much lower levels than would have prevailed otherwise. In essence, the Bank of Japan is carrying out the unorthodox monetary policy that the US Federal Reserve intimated it was considering in mid-2003. In other words, the BoJ is creating money and buying US Treasury bonds, which is helping to drive down US interest rates and underwrite US economic growth - and, by extension, global growth…

The amount of new yen that Japan ‘printed’ and converted into dollars during January 2004 alone was enough to finance 13 per cent of the US budget deficit. The investment of those dollars into dollar-denominated debt instruments clearly explains why the yield on the 10-year US Treasury bond fell last month in spite of the 10 per cent upward revision in the Bush administration’s budget deficit projections. By accident or by design, Japan is carrying out the most audacious endeavour to conjure wealth out of nothing since John Law sold shares in the Mississippi Company in 1720.”

Hugh Hendry of London’s Odey Asset Management suggests in a recent Barron’s magazine interview what this might mean for savers and investors:

“What’s happening today happened 300 years ago in the French economy when John Law, another Scotsman, was allowed to launch the first government-sanctioned bank, which replaced coins with paper money. Commerce boomed. Politicians recognized this correlation between issuing more money and people liking you. They issued more and more money, but it was a false promise. Nothing intrinsically was being added to the economy except promises, which could never be redeemed. Selling by speculators caused the stock market to correct. The correction encouraged the authorities to print more funny money. Ultimately, the continued pumping of liquidity destroyed the economy, the stock market and France’s currency.

More recently, the U.S. came off the gold standard in 1971 and the Dow Jones Industrial Average bottomed in 1974. Over the next 25 years, the Dow goes up 20-fold because every period of economic anxiety brought forward an orthodoxy of generous liquidity. Money has to go somewhere. It seeks to perpetuate itself by going into a rising asset class. This time, it is financial assets. Just like the Mississippi stock scheme in 1720 and the South Sea Bubble in London at the same time.

The authorities have broken their trust with us. Middle-class society preserves its wealth in paper assets and the honesty of the paper asset is that the central banks will not dilute your financial assets by printing too much money. We’re having to go to extreme measures to preserve our wealth by owning gold, a barbarous relic. Greenspan is the smartest guy on the planet, but you know what? Wise guys make mistakes.”

The Andrew Dickson White essay tells the story of how good men – with nothing but the noblest of intentions — can drag a nation into monetary chaos in service to a political end. Still, there is something else in Dickson White’s essay–something perhaps even more profound. Democratic institutions, he reminds us, well-meaning though they might be, have a fateful, almost pre-destined inclination to print money when backed to the wall by unpleasant circumstances. You will no doubt see the inescapable similarities between France then and the United States now.

Dickson White’s section sketching the hedging aspect of the roughly one-fifth gold ounce coin, the Louis d’Or during this tumultuous period speaks volumes. And after all is said and done, it might end up being the most important lesson of all. Gold, the one primary portfolio asset which is not another’s liability was the best defense in France in 1795; it is likely we will rediscover that it is the best defense now.

You should buy the book title "Money, markets & sovereignety" by Ben Steil and Manual Hinds.

It provides an interesting view on monetary history, monetary (national) sovereignety and a possible global monetary standard over the past decades.

At least 40% of the book is about the role of gold and e.g. the (voluntary) emergence of the gold standard in the 19th century as a natural (and just) reaction to globalism are nicely elaborated upon.

The present a random quote: "The post-1929 deflation was, in Hayek's words, "a secondary phenomenon" caused by "the real misdirection of production" resulting from the credit expansion instigated by the collapse of the gold standard in the years preceding it."

The book is quite insightful indeed, especially if you have interest in the role of central banks, money, gold and power.

And although lengthy this article presents an interesting view on the absurdity in todays markets where the US (and UK) are telling Iceland to do as they say in order to repay it's depts while those countries themselves will never live up to their dictated advice themselves.

The credit practices undertaken over the past decades by the so called rich countries quite similar to war practices in a way.

The book I mentioned before provides a rather nice quote summing up one of the core reasons for the problems we are witnessing today, namely that people always try to somehow deny their nature and the nature of the systems they bring about by mantling them.

The history of the gold standard over the last decade bears great similarity to the most recent history of capitalism. Every effort has been made to obviate its functioning at any point at there was dissatisfaction with tendencies which were being revealed by it. As a result, it could finally be assumed, with some semblance of authority, to have become completely ineffective.

DescriptionHarare Festival of Sound Money is a informal international celebration of Sound Money. Organisers would like to demonstrate all international visitors how easily and quickly a wealth can be created by appropriate printing press techniques. American and British citizens are most welcomed!Made me laugh..

Although perhaps difficult to tackle one objection against freegold would be that it uses gold as a store of value, thereby bearing opportunity costs for not using gold for a more productive (industrial) purpose.

As storing of wealth is basically about accounting, a simple data entry could sustain, provided some conditions (e.g. fraud prevention and non-duplicability) were fulfilled.

Perhaps difficult to put into practice, but it would save some opportunity costs.

I picture Iceland as a kind of miniature scale model of Wall Street, encased in a glass bubble, isolated from the rest of the world. Kind of like a snow globe you might buy at JFK.

Alek,

You should read the two Iceland articles if you haven't yet. I think you will find that all things are connected. Pay attention to the "liquidity" the Icelander's "created" amongst themselves. And think of this in terms of the quants and Wall Street in general, and the new FASB rules.

First, wanted to say that I just stumbled upon your blog, and I really enjoy it. You're saying some of the same things that I've been saying for months, and you provide a lot of great info to back it up.

I run a site that's only a few months old - but, thankfully, has gotten a decent amount of attention - called the Melting Pot Project. I just quoted and linked to your "The Collapse!" post for a post on our own main blog, and I'm sure I'll be using more of your stuff in the future. If you want to see the post, it's right here:

Based on what I've read so far, I get the feeling that you would really get a kick of some of the economic stuff we've put up. I'll point you in this particular direction for the moment, because this article involves hyperinflationary pressure from abroad:

Thanks for the link to your site. It looks great. Please help yourself to anything on this blog.

Jar of Dirt Economics. Very funny! With global M0 (physical currency) at over $5Trillion, and with arable topsoil being only 4 inches deep and only 1/32nd of the earths surface or 16 million sq. km., a jar of dirt is certainly more rare and precious than a fiat dollar, and probably more valuable. I think you may be on to something! How about jar of manure economics? That's basically what we've got anyway, is it not?

I shall read the links posted here. And perhaps even Liars Poker. Indeed much to read and little time.

@FOFOAAbout gold price manipulation: isn't the whole derivatives bubble also a way of manipulating gold? If the fed prints to much that money would normally flow into gold. Only now the "market" had created an alternative: a rapidly growing derivatives bubble/ponzi scheme.This might not have been a direct effort of the "gold manipulators", but by keeping gold artificially low people went looking for alternatives and the market came up with derrivatives.

Look at John Exter's inverse pyramid. Derivatives are at the top, gold is at the bottom. During expansionary times, wealth tends to flow up the pyramid. During collapse, or a flight to safety, it flows down.

You should also read Martin Armstrong's latest as he talks about the market manipulations of Goldman Sachs. I will probably post it tomorrow.

Obama: “…although there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks – “where’s our bailout?,” they ask – the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses. . .”

...THE TRUTH IS....!?

The fractional reserve-thing again and again ! The absurd leverage-hysteria that is inherent on the $-system and all its derivatives.

The liquidity-mania as to keep the $-system and the pseudo-economy afloat.

Everything, everywhere, has to be "liquidified" ad infinitum. Is money-mastering.

This corrupt (corrupting) monetarism system is doomed.

>>> The past decade, only CB gold-SALES made the goldnews. China's SDR shot before the bow might result in having gold-BUYS on the goldnews...when -it-is-time-.Not only private gold buying but also official CB gold accumulation after the CB gold-redistribution has finished.

These gold-buys will automatically revalue gold as the $-replacing wealth reserve that will be universally "traded". China wants its fair share of global power and will use gold to replace the fraudulent floating $-reserve dominator.

Freegold, as an internationally tradable wealth reserve, will find its structure where the $-reserve left the place.

Gold will rise out of its $-marginalization through simple "revaluation" by an increasing amount of gold buyers/accumulators having lost all (remaining) faith in paper creditworthiness.

And finally here is a website I stumbled across last year. Gold is actually being used as money here:

At the Free Lakota Bank, we issue, circulate and accept for deposit only AOCS-Approved silver and gold currencies. Silver & gold are a store of value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Since we deal only in real money, we do not participate in any central bank looting schemes.

Money is made possible only by those who produce. Paper is not money, instead merely a promise to pay. We hope that some day the rest of the world will awaken from the American Dream: the dream that a person can sustain life by consuming more than producing. We call it the American Dream because you must be asleep to believe it. Well, that dream now has a silver lining; as people discover the dream is really a nightmare, the only solution is a return to value: value that comes from production and honest trade.http://press.freelakotabank.com/aboutfreelakotabank.php

Might such a process of central bank gold reaccumulation herald a return to a formal monetary role for gold? A revived gold standard, we should emphasize, is politically infeasible - not merely its establishment, given the political power of contemporary independent central banks, but its sustainability were it to be established. The nineteenth-century gold standard operated in a world in which governments spent less than 10% of national income. "Fiscal policy" was almost meaningless in such a world. In our world, in which governments spend half or more of national income, the government sector is simply too large to be capable of subordinating its money flows to an international commodity rule. Furthermore, political systems have evolved enormously since the late nineteenth century, such that the voting masses now expect government institutions to intervene actively to protect current incomes and employment. They are highly unlikely to tolerate indefinitely a government institution with a monopoly on currency production that appeared to be operating as a passive observer of a self-regulating system.A private gold based monetary system, however, is very different proposition, particulary given advances in computer, telecommunications, and smartcard technology over the past ten years..... Some have already imagined it, and are living it. There already exist e-money firms that manage investment accounts denominated in gold and intermediate payments in gold across account holders.Comes pretty close to freegold huh?

Perhaps they were even referring to - among others - the free Lakota Bank.

For the ones still doubting to buy the book I recommended (and to add some thoughts to this forum):

Our current period of international economic relations is as unusual as it is precarious. Eras of economic protectionism have historically coincided with monetary nationalism; eras of liberal international trade, on the other hand, have coincided with a universal monetary standard. Today we are witness to an unprecedentedly liberal global trade and investment regime operating side by side with the most extreme doctrine of monetary nationalism governments have ever contrived. This is a recipe for periodic crisis, both economic and political.That is quite some explaination for the mess we're seeing today...

I read Fekete’s article dismissing hyperinflation and felt he glossed over two important observations.

1) As you pointed out, hyperinflation is more a psychological event than a financial event.

2) He seemed to consider hyperinflation from the perspective that the U.S. is a self-contained economic bubble. The U.S. imports most of what it “consumes” on a daily basis. So what happens if foreigners stop lending us the money with which to purchase their wares? What happens if they get shy about selling us imports in exchange for a currency they perceive as being debased? I envision a potential shortage of imported goods, which, according to the law of supply and demand, would cause price increases in imported goods, not price deflation. Such an event could be the trigger for psychological hyperinflation.

By the way, anyone ever noticed that the only way for the dollar to become a reserve currency was to import more than to export?

The US is the only party able to create dollars. If the dollar is a world reserve currency, and other parties want to get hold of it, how to obtain it other than to trade it for something the have? As other countries fiat currencies have little use outside their national market, only products remain to make that trade.

I have "Money, Markets & Sovereignety" by Ben Steil and Manual Hinds on my list of books to look at buying next time I go to the book store. Thanks for the good excerpts.

To all,

The above post received a ton of visitors last night after dollarcollapse.com linked to it.

Today, I noticed that Fekete's article mentioning Karl Denninger has been inserted into the pdf's on his site. I have updated the post to make note of this.

Professor Fekete, if you happen to be reading this, I have the greatest respect for you even though it didn't come through in this blog post. Please see my previous posts about you. Just search Fekete at the top of this blog and you will find 15 posts over the last 8 months that praise you, quote you and spread your great words.

Excellent analysis in the article above (from "The Atlantic"). The author is a former senior IMF official and an economics professor at MIT. It thus lends academic as well as practical credibility to his writings.

It is actually an essay about the state of affairs in the financial behemoth industry on Wall Street and the parallels it has with typical problems in emerging markets.

There is also no tendency to use market models that (try to) rationalize everything, instead the author simply looks at the reality from an IMF economist's point of view, which sees the macroeconomic fundamental landscape of an economic entity (a country, a state, trading block etc.) and how the basic laws of nature act on that substrate. It is not an old or obsolete point of view when applied to Wall Street simply because the US is more "sophisticated" that other emerging markets. What is more sophisticated, the author states, are the ways in which the inherent Keynesian political-economic power structure is projected on the society and not the robustness of the system (as we all witnessed the credit lock-up in September).

He avoids the escape towards quantological, financial-esoteric and virtual-reality type of analysis. But a growing percentage of financial innovation is exactly in this field, thanks to advances in the dynamics of chaotic (or complex) systems and game theory, resulting in an unorthodox marriage of the two disciplines hailed as the holy grail of the modern financial profession. This issue must be addressed by any serious analyst.

So far, great wealth has been accumulated but it seems at an increasing cost to the population at large, as consequences start to dribble down and the hidden delicate structure of the financial behemoth bijects between the virtual and the real world. It may turn out at the end that the cost/wealth performance of modern financial engineering is well below what is historically a norm, but we are still not there yet in order to make that conclusion.

There is, of course, much that is valuable and new in the financial engineering discipline(s), as with any knowledge that extends the boundaries of our understanding. It is the application, not the knowledge that brings consequences.

But, the time has come to estimate whether a Keynesian setting is the best way to go forward. How robust is this system with respect to regulation/oversight failures, trade imbalances and underdevelopment? Are we so far advanced in the West that there is no need anymore for checks and balances on a macroeconomic scale, the same actions that the IMF includes in the help-packages to emerging economies in trouble? Or, what is the most difficult to answer, has Keynes paved the road leading the Western world to ruin by Narcissistic self-destruction?

Interesting article. It's also interesting how Food and Energy are not included in the CPI calculation - and those are the two expenditures that are hardest to cut back on. Luxuries and other assets are falling because they were over-priced and they are, well, luxuries! It boggles my mind that many think that if the housing prices would just go back up to the over-priced values everything would be fine again. I do think Inflatio can be postponed by the sheer will of the people refusing to spend - but not in all areas and not forever. I personally think food is unconfortably high and may go higher. I highly doubt the government will have enough self-control and foresight to withdraw all the money they've put into the system. As for Fekete's apparent change in thinking - maybe because hyper-inflation is getting more and more likely the thought is beginning to scare him that it might be actually able to happen and so he's scared and wishful thinking? After all - hyper-inflation is a scary thought.

I have made the point previously on this blog that all of these credible and convincing deflation theories may actually be sealing our fate in the direction of hyperinflation. Because the less that Ben Bernanke and others fear hyperinflation, the more likely they are to overshoot.

If you read my post, The Collapse, it proposes a theory that Bernanke may be down to only two options at this point; undershoot or overshoot. The target he thinks he is aiming for may have already disappeared as an option.

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The above is presented for educational and/or entertainment purposes only. Under no circumstances should it be mistaken for professional investment advice, nor is it at all intended to be taken as such. The commentary and other contents simply reflect the opinion of the author alone on the current and future status of the markets and various economies. It is subject to error and change without notice. The presence of a link to a website does not indicate approval or endorsement of that web site or any services, products, or opinions that may be offered by them.